FDIC: Return to Profit Fails to Boost Bank Lending

From Risk.net:

Assistance from the US government has helped the country's banking industry back into profit, but the improvement hasn't been reflected in increased lending, according to the Federal Deposit Insurance Corporation (FDIC).

In its latest Quarterly Banking Profile, issued yesterday, the FDIC reports an aggregate net income for the banks it supervises of $914 million in the fourth quarter of 2009, down from $2 billion in the third quarter but still a huge rebound from the $37.3 billion loss the industry suffered in the fourth quarter of 2008.

But the report has more bad news than good. Non-current loans and leases, mainly residential mortgages, continued to rise, hitting $391.3 billion – 5.37 percent of all loans by value, the highest level ever recorded. And, the FDIC adds, the industry also reduced its coverage ratio – reserves as a fraction of non-current loans and leases – to a 28-year low of 58.1percent. In other words, the banks only managed to scrape into the black by deciding not to increase their reserves in line with their problem loan books – had they done so, it would have meant another $7.4 billion in reserves, meaning the industry would have been well into the red.

Although much of the aid to the banking industry had the explicit intention of improving the supply of credit to the wider economy, this has not yet happened. The FDIC has found: the quarter was the fourth in succession to see a drop in total assets, which fell 5.3%, the largest single-quarter drop since the FDIC was founded in 1942. Commercial and residential mortgages, and commercial and industrial loans fell hardest. This might represent a drop in demand, as well as reluctance to lend: in its most recent loan officers' survey, released last month, the Fed found that "demand from both businesses and households for all major categories of loans weakened further, on net, over the past three months".